Online discount war: Flipkart reports a loss of Rs 2000 crore

Picture source: ThinkStockFlipkart posted a loss of about Rs 2,000 crore in the year ended March, amounting to a fifth of its rapidly rising sales, as the country’s largest online retailer spent heavily to fund discounts to win customers and stay ahead of rivals Snapdeal and Amazon India while investing in back-end operations.

Flipkart Internet, which runs the consumer-facing portal, registered a net loss of Rs 1,096.4 crore, while that of Flipkart India, the wholesale arm, was Rs 836.5 crore, according to a Registrar of Companies filing on Monday. A year ago, the units had a combined loss of Rs 715 crore. Combined sales trebled to Rs 10,390 crore as reported last month. A Flipkart spokesperson declined to comment on the company’s financials. Last month’s numbers came from its annual MGT-07 return that lists sales and net worth. The latest data is from the complete standalone financial statement that Flipkart has filed.

India’s leading online marketplace may need to keep sustaining losses as it seeks to win market share by offering the best prices. “Flipkart could post between 35-50% of its sales as operating loss due to its high logistics cost and discounting,” said Ruchi Sally, director at retail consultancy Elargir Solutions. “The only way to reduce (this) is to diversify in higher-margin product categories such as apparel and home.”

The company expects sales to surge sixfold this year, according to head of commerce Mukesh Bansal. He told ET in September that the company was on course to sell goods worth $10 billion (Rs 65,000 crore) in fiscal 2016. Flipkart is also looking to double its seller count by March from 60,000 now in an effort to convert itself into a pure marketplace similar to rival Snapdeal. At the same time, the company seems to have been hiring aggressively as reflected in employee benefit expenses that rose threefold to Rs 476 crore. “The current model of Flipkart doesn’t make any economic sense as any company selling goods below manufacturing cost without any margin will always attract customers. But a sustainable business can’t run like this and Flipkart needs to look for alternate revenue models such as advertising and data selling to make money,” said the CEO of a leading retail group.

To be sure, India’s ecommerce companies are said to be getting more circumspect with discounts as they seek to shore up their balance sheets. On the other hand, both Flipkart and Snapdeal are flush with cash as overseas investors in the two companies look to get a piece of a market that’s set to surge further. Meanwhile Amazon India has indicated that it may exceed the $2 billion that CEO Jeff Bezos had pledged to spend last year, with sales growing more rapidly than expected. A recent JP Morgan report noted that Indian Internet companies will likely need to chart a longer and more tortuous path to profitability than some of their Chinese counterparts, and will likely see much greater consolidation for scale and better pricing power.

“Flush with cash, firms could so easily develop expensive habits such as embarking on costly and perhaps undifferentiated customer acquisition strategies and too quickly elevating their fixed-cost structures, which may be difficult to wind back when circumstances change,” said Viju George of JP Morgan. India’s ecommerce market is set to rise to $103 billion by FY20 from $26 billion now, according to Goldman Sachs.